Stock market records worst day of 2023 as rising yields contribute to ‘perfect storm’

Since the beginning of the month, traders in federal funds futures have priced in the more aggressive Fed after initially skeptical that the central bank might hit its forecast for a peak fed funds rate above 5%. A few traders are now pricing in the outside possibility of a peak rate near 6%.

The yield on two-year Treasury notes

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It jumped 10.8 basis points to 4.729%, the highest finish for the US session since July 24, 2007. 10-year Treasury yield

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It rose 12.6 basis points to 3.953%, the highest level since November 9th.

“At this point, the bond market has almost given up on optimistic expectations of further limited increases and a series of rate cuts in the back half of 2023,” said Daniel Berkowitz, chief investment officer at Prudent Management Associates, in emailed comments.

Meanwhile, the US dollar also rose, with the ICE US Dollar Index adding 0.2% to February’s rebound. Arbeter also noted that breadth indices, a measure of the number of stocks participating in the rally, have previously deteriorated, with some metrics reaching oversold levels.

“Just another perfect storm against the stock markets in the short term,” Arbeter wrote.

Higher yields can be negative for stocks, driving up borrowing costs. More importantly, higher Treasury yields mean that the present value of future earnings and cash flows are discounted more. That could weigh heavily on technology companies and other so-called growth stocks whose valuations are based on earnings far into the future. These stocks took a hit last year but led the gains in early 2023, holding up over the past week even as yields continue to recover.

Yields were on the rise after a series of hotter-than-expected economic data boosted expectations of a Fed rate hike.

Meanwhile, weak guidance on Tuesday from Home Depot.

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and Walmart Inc.

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It also contributed to the weakness of the stock market.

Home Depot sank more than 7%, making it the biggest loser among the components of the Dow Jones Industrial Average

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The decline came after the home improvement retailer reported a sudden drop in same-store sales in its fiscal fourth quarter, which led to a surprise drop in fiscal 2023 earnings and set aside an additional $1 billion to pay more of its associates.

“While Wall Street expects resilient consumers after last week’s strong retail sales report, Home Depot and Wal-Mart are more cautious,” Jose Torres, chief economist at Interactive Brokers, said in a note.

“This morning’s data provides more mixed signals regarding consumer demand, but during a traditionally weak seasonal trading period, investors are shifting towards a half-empty view on the back of a year characterized by the exact opposite so far, glass half-full perspective,” he wrote.

The Dow Jones index fell 697.10 points, or 2.1%, to close at 33,129.59, while the Standard & Poor’s 500 index.

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It fell 2% to close at 3,997.34, ending below the 4,000 level for the first time since Jan. 20. The drop cut the S&P 500’s year-to-date gains to 4.1%, according to FactSet, which is less than half of the 9 percent annual gain it posted on Feb. 2.

NASDAQ Composite

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It fell 2.5%, trimming its year-to-date gains to 9.8%. The losses left the Dow marginally negative for the year, down 0.5%. It was the worst day for all three major indices since Dec. 15, according to market data from Dow Jones.

Arbeter identified a “very interesting group” of support below Tuesday’s low for the S&P 500, with a pair of trend lines converging along with the index’s 50- and 200-day moving averages near 3970 (see chart below).

“If that area does not represent pullback lows, then we have more problems ahead,” he wrote.